I took out credit card debt to pay for my daughter’s chasuna. I didn’t have the cash flow to cover the last $50,000 of expenses. My question is whether I should liquidate my taxable or retirement accounts to pay down this debt? Perhaps I should pay down this debt slowly overtime? My big concern is triggering a large tax bill. I’d love to hear your thoughts. – Anonymous
This is a loaded question with many topics to address. I imagine some of what I say may be unpopular, but that won’t stop me. Let’s tackle each issue and hopefully it will be informative to readers from a financial planning and lifestyle perspective.
- Never go into credit card debt to pay for a wedding: While it’s too late for this questioner, it may be instructive to many readers. Credit card debt is the cancer of personal finance. Given the extremely high level of interest rates, it can very quickly metastasize out of control. Even if you have a “strategy” to handle your credit card debt, it likely won’t work out and will grow to a level that is insurmountable. The best approach to credit cards is to pay the bill in full every month or to not use them at all. Parents should not be taking out credit card debt to pay for a wedding. If you are planning to do that, then you are making a big mistake. I realize this opinion may be unpopular to many.
If you need to take out credit card debt to pay for something, it means you are spending too much money. I realize that in certain communities a particular type of wedding may be expected. You should shun those absurd arbitrary social guidelines and live within your means. Thankfully, there are wonderful and affordable wedding options, like takana halls, that should be considered. Derailing your financial life to pay for a wedding is a suboptimal decision.
- Think about the message you are sending: Aside from just the financial reasoning, think about the type of message you are sending to a newly married couple by stretching yourself financially to throw a wedding that you can’t afford. Children tend to emulate the actions of their parents, even kids of marriageable age, so it’s imperative to continue to model the right path for future generations. The young couple may believe this financial imprudence is an appropriate approach for their many life decisions. If, on the other hand, you make tough decisions and spend within your means, your kids are more likely to follow the example you set. Everybody will be better off financially because of it.
- Strategy for paying back your debt: Now let’s address your question of how to pay back your debt.
Cash: If you have any funds sitting in cash that you don’t need for your monthly nondiscretionary expenses (i.e. mortgage, food, etc.), then start by using those funds since there are no tax ramifications or penalties when using this money.
Taxable account: You mentioned that you have a taxable account. It is best practice to use a taxable account before using a retirement account to try to avoid derailing your retirement savings. In today’s world, retirement can last 30 or more years, which is a long period for which you will need to accumulate enough funds to pay for your expenses. Also, since healthcare costs tend to rise as you get older, having a sufficient nest egg is imperative. As I often tell my clients, if you don’t have enough money to retire, you will need to rely on your family to help you with expenses. That is a very precarious situation to find yourself.
You may need to pay taxes if you sell positions with gains in your taxable account. However, since the market has dropped this year, you may be able to minimize your tax liability by using losses to offset gains and using the proceeds to pay down the credit card debt. Even if you do have gains, assuming they are long-term gains, you will pay a favorable long-term capital gains rate when selling these investments.
Roth IRA: Next account to use to minimize your tax liability is a Roth IRA. Even though withdrawing funds from this account is unfavorable from a retirement planning perspective, it may be less tax disadvantageous than other retirement accounts.
You can withdraw the original contribution amounts from a Roth IRA at any age without taxes or penalties. If you are at least 59 ½ and have met the 5-year holding period criteria, you can also withdraw the growth on those contributions tax-free and penalty-free. Unfortunately, withdrawals from a Traditional IRA are generally taxable and may incur penalties if taken before age 59 ½.
- Do NOT let taxes drive your decision: You mentioned taxes as a concern, and I’ve included some tax mitigation strategies. However, this should not be your main focus. While nobody likes paying taxes, it is a necessary part of life. Furthermore, your issue with credit card debt is far more problematic than paying taxes. Don’t let small irrelevant details (i.e. taxes, in this situation) influence the need to rid yourself of credit card debt as soon as possible. The national average for credit card debt interest rate is over 23%. If you delay paying it off, it will very quickly grow out of control. There is no better financial decision in your life right now than to pay this down.
- The correct way to afford an expensive chasuna: I realize that as much as I am a proponent of throwing a relatively inexpensive wedding, many people won’t do that. Therefore, if you are dead set on throwing a lavish wedding for a child, this is a framework to make that possible:
Start early: When a child is born, you should open an account in your name so that you control the money. You should then immediately start funding it. The longer you wait, the shorter your investment dollars will grow. Time is your biggest asset, and you should make sure not to waste it.
Automate your savings: If you need to manually deposit money into this account, you will never stick with the strategy. It will be just too hard as other life expenses get in the way, or you get nervous from market gyrations. Instead, pick a dollar amount to contribute monthly and have it deposited and invested automatically. It doesn’t need to be a vast sum of money. Over a multi-decade time horizon, even a modest amount of money can add up.
Invest aggressively: Given the long-time horizon of a newborn, these funds should be invested aggressively. This means they should mostly be invested in the stock market, which will likely outpace inflation and many other investments. For example: If you save $200 a month for 22 years, from when your child is born until they get married, and the investments grow at 8% annually, you will have approximately $138,000 to put towards the wedding. That’s not a bad start, even with factoring in inflation!
Set up separate accounts for each child: While the money should be held in the parent’s name, it is advisable to segment the funds for each child. You don’t want to be in a situation where the oldest child/children use up all the funds and there is nothing left for the younger children.
In many financial institutions you can put a nickname on the account, which will be helpful from an administrative perspective. For example, as soon as little Shani is born, you can set up an account and give it the nickname “Shani’s Wedding.” When Shira is born, you setup another account with the nickname “Shira’s wedding.” Becky, Lily, and Miri will similarly have their own accounts. This will keep the wedding money for each child separate.
As I mentioned, I don’t think that paying for a lavish wedding should be a top priority for most frum families. It’s not necessary, prudent, or sensible. There is a myriad of better places to allocate your funds. This includes helping the young couple get established in their new life together. A wedding is a few hours experience that most people will forget about the second after they walk out of the wedding hall. On the other hand, spending money on education, getting started in business, or for a down payment for a house, are all far more practical choices that will produce a higher return on these dollars.
If you have already taken out credit card debt to pay for a wedding, the best path forward is to pay it back ASAP and never do that again!
